Monti Warns Germany That Euro Crisis Threatens Europe’s Future

Tensions within the 17-nation euro area are undermining the future of the European Union, said Italy’s Prime Minister Mario Monti as the stand-off on European Central Bank support for Italian and Spanish debt hardened.

“The tensions that have accompanied the euro zone in the past years are already showing signs of a psychological dissolution of Europe,” he told Germany’s Spiegel magazine in an interview published Sunday. “I can only welcome the ECB’s statement that there is a ‘severe malfunctioning’ in the market for government bonds in the euro region. It’s also true that some countries have to shoulder ‘extraordinarily high’ costs to finance their debts. That’s exactly what I’ve been saying for a long time.” He urged swift action to lower borrowing costs.

Investors and politicians are still grappling with the significance of comments on sovereign debt purchases by European Central Bank President Mario Draghi last week. While markets initially tumbled on Aug. 2 after Draghi said Spain and Italy would have to formally request a resumption of the bank’s bond buying, they rallied the following day as investors concluded that ECB action would occur, albeit on an unknown future date.

“The ECB did not restart its bond purchases this week, as widely expected, but pointed to a more important and constructive shift in its approach to managing the crisis,” Bruce Kasman, chief economist at JPMorgan Chase & Co., said in an Aug. 3 note to clients. “If the arrangement sketched out is fully implemented, the ECB will provide an effective liquidity backstop, enabling sovereigns to retain access to markets for a large portion of their funding needs.”

Italian Yields

Spain’s 10-year bond yield rose as high as 7.44 percent right after Draghi’s press conference, before ending the week at 6.77 percent. Yields on Italy’s similarly dated bonds rose to 6.28 percent and ended the week at 6.01 percent. That compares with 1.42 percent for 10-year German debt.

Monti said Italy was effectively helping German borrowing costs as the federal government benefited from its neighbors’ rates.

“The high yields Italy has to pay right now subsidize the low ones Germany is paying,” he told Spiegel. “Without that risk, the yields on German government bonds would be somewhat higher.”

Spain and Italy, whose borrowing costs have become a key indicator of the euro-area crisis, meanwhile suggested that bailout requests may not be imminent or necessary.

Bond Buying

The Spanish Economy Minister Luis de Guindos told ABC newspaper at the weekend that his country awaits details of the ECB’s bond-buying proposals before deciding whether to request aid. Both Italian Bank of Italy Governor Ignazio Visco and Minister for Economic Development Corrado Passera said in separate newspaper interviews that the country doesn’t need a bailout.

“Not only did the ECB not take any steps backward, but it took decisive steps forward to correct the functioning of monetary policy transmission, and therefore of the stability of the single currency,” he told the newspaper.

Draghi’s plans to reactivate the ECB’s bond purchase program generated some critical comment in Germany. Former ECB Chief Economist Otmar Issing said price stability is “massively threatened,” Frankfurter Allgemeine Sonntagszeitung reported, while Juergen Stark, Issing’s successor, said the ECB is being asked to act outside its mandate, faces conflicts of interest and is losing its independence, the same newspaper said.

Vacation Time

There was no official German reaction to Draghi’s statements, partly because it’s vacation time across Europe.

Spain’s Prime Minister Mariano Rajoy is in his native Galicia, German Chancellor Angela Merkel is walking in the Italian Alps, and French President Francois Hollande is staying at an official vacation residence in the South of France.

Euro-area finance chiefs won’t meet until Sept. 3 to discuss possible Spanish bond buying and the economic situation in Greece, Italian news agency Ansa reported Aug. 3, citing unidentified European officials. European governments would not confirm the meeting. The next meeting of the ECB’s governing council is Sept. 6.

Monti also appealed for European governments not to be overly bound by their parliaments.

“Of course every government has to follow its parliament’s decisions,” he told Spiegel. “But every government also has the duty to educate the parliament” or risk making a euro-area breakup more likely.

‘Anti-Democratic’

Hans Michelbach, a lawmaker representing the coalition Christian Social Union, said in an e-mailed statement that elements of Monti’s comments are “anti-democratic” and incompatible with European principles. Michael Meister, the deputy leader in parliament of Merkel’s Christian Democratic Union, called for “not less, but more democracy in Europe,” Tagesspiegel newspaper reported after Monti’s remarks.

Yesterday, the so-called “Troika” of the International Monetary Fund, the ECB, and the European Commission, held its latest talks with the Greek government about the progress of its aid program.

“We made a lot of good progress,” Poul Thomsen, the IMF’s representative to Athens said after the meeting. “We’ll take a break now and come back in early September.”